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TMI Blog2017 (10) TMI 1516X X X X Extracts X X X X X X X X Extracts X X X X ..... - HELD THAT:- Provisions made on the basis of an actuarial valuation cannot be considered a contingent liability. The basic thing to be remembered is that unlike other businesses life insurance business is being regulated by IRDA. Regulatory body issues instructions time to time. One of the instructions was about follow actuarial valuation while preparing the accounts. The actuarial method of valuation has been recoginsed an approved method for valuing liabilities by various courts. So, we hold that method followed by the assessee for valuing its liabilities cannot be rejected. Besides Rule 5(a)of the First Schedule deals with provisions pertaining to expenditure or allowance or other prescribed liabilities and not in respect of income. ln short the AO is not authorised to disturb any income reflected in the P L account. The assessee was following the method of creating provisions based on actuarial valuation and the AO had accepted it while passing orders u/s.143(3)of the Act. Without bringing changed circumstances the AO should not have held that liabilities were contingent. AO had not raised any objection about non filing of bifurcation of data which was made available to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee dated 11/ 01/2013 he held that the assessee was following mercantile system of accounting that expenditure incurred during the relevant previous year were allowable that the expenses of ₹ 24.63 lakhs did not pertain to the year under appeal that treatment given by it to the said expenditure was not in accordance with the provisions of the Act i.e. section 145 of the Act Finally, he disallowed an amount of ₹ 24,63,854/- 2.1.Aggrieved by the order or the AO the assessee preferred an appeal before the First Appellate Authority(FAA) and made elaborate submissions. After considering the available Material he held that the addition or ₹ 24,63.854/- was not an expenditure was inadmissible u/s. 30-43B of the Act that the addition made by the AO could be deleted if the items of prior period income had been offered to tax in earlier years. He directed the AO to delete the addition after verification of the fact that the items of prior period income had been offered to tax in the earlier years. 2.2.During the course of hearing before us the Departmental Representative (DR)argued that FAA had not appreciated the fact properly that he passed cryptic order w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... led for the details of prior period expenses and explain the reason for disallowance of expenses. In response, assessee submitted its reply along with supporting evidence justifying its claim. After perusing the reply of the assessee, the AO however. did not find merit in the same. He was of the view that since the assessee is following mercantile system of accounting, the expenditure incurred during the relevant previous year is allowable. He was of the view that since the expenditure of ₹ 2,58,31,240/- was not relatable to the impugned assessment year. the same is not allowable. Accordingly, after discounting the adjustment of the prior period expenditure made by the assessee of ₹ 25.08.640/-. the AO added back an amount of ₹ 2,33,22,600/- to the income of the assessee. Being aggrieved of the addition so made, assessee preferred appeal before the CIT(A). The learned after considering the submissions of the assessee and perusing the materials on record, though agreed with the suo motu adjustment made by the assessee however he was of the view that the same is acceptable if the prior period income has been offered to tax in earlier assessment years. He, theref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, the assessee has not claimed deduction of prior period expenditure of ₹ 2,58,31,240/-. What is discernible from the material placed before us is in the relevant previous year the assessee has shown prior period expenditure of ₹ 2,58,31,240/- and prior period income of ₹ 2,33,22,600/- in its books and the net difference of ₹ 25,08,640/- has been offered as income in the computation of total income. Therefore, it is evident, assessee has not claimed any deduction of prior period expenditure of ₹ 2,58,31,240/- per se as inferred by the AO. On the contrary the assessee has voluntarily added back part of the expenditure to the total income following the consistent accounting method adopted by it. It is also evident that assessee is following similar method of accounting from earlier assessment years and offered similar income on account of adjustment of prior period income and expenditure and the AO in assessments completed u/s. 143(3) has accepted non only such accounting treatment given by the assessee but also the income offered. Therefore, when the assessee has not claimed any deduction on account of prior period expenditure by debiting it to the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... demands that earlier years orders should always be followed if same are not reversed or for the subsequent A Y.s. legal provisions stand changed. ln the case before us both the factors are missing. Considering the above we hold that there is no legal or factual infirmity in the order of the FAA. So, upholding the same we decide first ground of appeal against the AO as stated earlier. 3.Second GOA is about deleting the addition of ₹ 418.63 crores being provisions for insurance claim debited in the P L a/c. During the assessment proceedings the AO found that the assessee had claimed an amount of ₹ 418,63,17,010/- in the P L account. He called for explanation in that regard and after considering the same held that the outstanding claims were unascertained liabilities that as against claim debited P L account for actual claim settled the provisions were not taken into account that claims made at first point of time was not necessarily settled as such that as per the specific provisions of the Act such provisions for claim were not admissible deductions. Referring to the table of last two years submitted by the assessee in that regard he held that the net claims sett ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... b) of the Act that the ratio of Hon'ble Supreme Court in the case of General Insurance Corporation of India was applicable in favour of the revenue. He also referred to the claims incurred net' and stated that as a foot note at Schedule-2 it referred to consider Note 13 which qualified the figure 'subject to confirmation' and 'consequential adjustment if any'. Referring to pg. 74 of the PB he stated details pf ₹ 1495.95 crores were not provided or discussed as to what included in the figure that it was not clear as to whether actuarial figure of ₹ 830 crores was taken into consideration or not. Referring to the Schedule 16 the DR stated that the assessee had not submitted the bifurcation and data which was before the actuarial though AO had specifically asked for such details, that the matter of dispute were IBNR and IBNER, that such claims were apprehended by the assessee on account of some event that such claims were neither preferred nor were received, that such claims could be received in future as per IRDA guidelines, that in absence of data it was not ascertainable that if any such provisions of IBNR/IBNER were provided in earlier years, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is required to draw its accounts as per the rules and regulations issued by IRDA that C AG appointed auditors audit its accounts that in note 8 of Schedule 16 of the accounts gives details of liability on account of claims and accounting of estimated recoveries that it would accept claims made during the year by the policy holders that it has included IBNR and IBNER under the head claims received that IBNR and INBER were based on actuarial valuation that the AO had held that the provisions made for insurance claim received during year represented unascertained liability. 3.3.1.As an Insurance company the assessee has to follow rules and guidance issued by IRDA that in pursuance of the directions Of IRDA the assessee had prepared its books of Accounts that Statutory Auditors had not raised any objections about IBNR and IBNER, that C AG had not expressed any doubts about the accounts maintained by it that it was following the notification issued by IRDA with regard to general insurance business that Para 5 or Part I of the schedule as prescribed by IRDA deaIs with claim made by the assessee under the heads IBNR and IBNER (Pg. 172-73 of the PB.) that both the items were based on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect the errors in the accounts of an insurance business and undo the entries made therein. XXXXX In life Insurance Carporation Of India v. CIT [1964] 51 ITR 773 (SC), their Lordships were dealing with the parl materia provisions contained in the Indian Income-tax Act, 1922. The court analysed the scheme underlying the relevant provisions of the Insurance Act, 1938, and the Indian Income-tax Act, 1922, and held that where the accounts of an insurance company engaged in insurance business are required to be submitted and approved by the Controller of Insurance, the Income-tax officer has no power to charge the figures in the accounts of the assessee. A. K. Sarkar J.. recorded in his opinion (page 778): The assessment of the profits of an insurance business is completely governed by the rules in the Schedule and there is no power to do anything not contained in it. The reason may be that the accounts of an insurance business are fully controlled by the Controller of Insurance under the provisions of the Insurance Act. They are checked by him. He has power to see that various provisions of the Insurance Act are complied with by an insurer so that the persons who have insure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not attracted since each assessment year is separate in itself. The Tribunal held that there ought to be uniformity in treatment and consistency when the facts and circumstances are identical, particularly in the case of the assessee. This approach of the Tribunal cannot be faulted. The Revenue did not furnish any justification for adopting a divergent approach for the assessment year in question. Question (b), therefore, does not also raise any substantial question of law. The assessee was following the method of creating provisions based on actuarial valuation and the AO had accepted it while passing orders u/s.143(3)of the Act. Without bringing changed circumstances the AO should not have held that liabilities were contingent. 3.3.3.lt was brought to our notice that the AO had observed that reinsurance ceded and recoveries not considered While calculating the liabilities and that the observation were factually incorrect. We find that if the details of provisions for claim are analysed it becomes clear that the working of the assessee is based on net of reinsurance(Pg.63 of the PB)and thus the observation made by the AO is contrary to the facts. 3.3.4.We find that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clause having overriding effect over the other provisions combined in the Act. For making the disallowance of any expenditure or allowance, which falls under the provisions of sections 30 to 43B. It should be firstly, be an expenditure or allowance and secondly, it should he admissible under sections 30 to 43B. Otherwise no other disallowance can be made. For the purpose of Income-tax, first of all the figures of the income of the assessee is to be drawn-up in accordance with the provisions of the first schedule to the Income-Tax Act and satisfying the requirement of Insurance Act and such a determination of Income is binding on the AO and there is no power to tinker with such and account. This proposition has been upheld by the Hon'ble Supreme Court in case of General insurance Corp. of India v. CIT, reported in [1990] 240 ITR 139. Thus, when the income of the assessee as well as the expenditure are governed by specific provision which have an overriding effect then it is not open for the AO to invoke the other provisions of the Act for carrying out the disallowance of adjustment in the income. Thus, we hold that no disallowance u/s 14A can be made in the case of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X
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